Why Westpac may be on its own
COMMBANK, NAB and ANZ may not join Westpac in raising mortgage interest rates "for a few weeks or months", according to one analyst.
The remainder of the Big Four were widely predicted to follow suit after Westpac and subsidiary St George fired the starting gun on out-of-cycle rate hikes late Wednesday, blaming "higher wholesale funding costs".
The 14 basis point increase to variable interest rates for owner-occupiers and investors comes during Australia's longest ever period without an official cash rate change. The Reserve Bank has kept the cash rate on hold at its record low of 1.5 per cent since August 2016.
In a client note, UBS analyst Jonathon Mott described Westpac's mortgage book repricing as a "very courageous decision". "The repricing today offsets the pressure from funding costs and is equivalent to more than half an RBA rate rise to its customers," he said.
"Will the other banks follow? Challenging revenue has been a theme across the banks. However Westpac's more aggressive growth until June may have caused the larger NIM (net interest margin) contraction than peers."
Net interest margin is a key measure of bank profitability. It refers to the difference between the amount of interest the bank earns from loans and the interest it pays out on customer deposits.
Mr Mott said NAB's net interest margin "declined slightly" in the June quarter, while CommBank reported the impact from funding costs was "zero in the June half" as it was offset by deposit repricing.
"While the banks generally follow each other in out-of-cycle repricing, we would not be surprised to see the other banks hold off for a few weeks/months as they are not facing the same NIM pressure as Westpac and are aware of the ongoing focus from the ACCC," he said.
"This would also enable the other majors to regain some share."
He said in addition to the Banking Royal Commission, the banks' pricing decisions were under "intense political scrutiny".
He pointed to a recent speech by Prime Minister Scott Morrison while still Treasurer in which he said, "Too often it's the loyal customers that are left to foot the bill through higher interest rates when financial institutions offer temporary discounts to lure in new customers."
Mr Mott warned if the major banks all hike rates, the government may decide to increase the Bank Levy that currently stands at six basis points. "In the UK the Bank Levy was increased on nine occasions," he said.
Speaking to reporters on Wednesday, Mr Morrison said called on Westpac to explain itself.
"They have to justify, in this environment when people are really feeling it, why they believe they need to clip that ticket a little harder when people in Australia and their customers I think are doing it tough," he said.
"So that's for Westpac to explain, not for me, that's their decision, and others will make their own decisions, but if you don't like what Westpac's done, go to another bank, because competition is the key to a more competitive and a stronger and more accountable banking system.
"They can make those decisions but they're accountable for those decisions, and I think customers will make up their own minds as they should."
ABC 7.30 host Leigh Sales grilled Westpac chief executive Brian Hartzer on Wednesday night, asking why the bank couldn't absorb the costs out of its $4.2 billion profit.
"An ordinary household has to work within their budget to pay the extra money on their mortgage yet one of the wealthiest institutions can't do the same?" she asked.
Mr Hartzer said the bank giant had worn the cost for the past six months, hoping it would go down but "we sadly had to conclude this is a more permanent change or certainly it is going to persist for a little while".
Westpac's last profit was up six per cent but Mr Hartzer said margins had been "significantly impacted" since costs began to rise in February.
"Part of my job sometimes is to make difficult decisions that are about the long-term sustainability of our business and that involves addressing increases in funding costs," he said.
From September 19, a Westpac customer with a $500,000 loan will have to pay an additional $43 a month or $516 a year. A customer with a $1 million loan will pay an extra $87 a month or $1044 a year.
"While banks are entitled to make a profit, some Westpac home loan customers will be disappointed with the bank's decision to increase their interest rate," RateCity research director Sally Tindall said in a statement.
"Most households will be able to absorb the rate hike, however anyone who overstretched to get in the market will feel burdened by this extra cost.
"Now that Westpac has hiked, taking the brunt of the bad PR, we expect the other three banks to follow suit. If your lender hikes your interest rate, it's the perfect time to start considering your options."